Monday, August 22, 2016

Are You Ready for the New Overtime Rules?

Beginning December 1st, 2016, new overtime rules go into effect which could extend overtime eligibility to over 4 million workers in the United States.  Currently, for workers to be exempt from overtime pay, they must pass three tests: 
  1. The salary test (be salaried).
  2. The salary level test (weekly pay is equal to or greater than $455 per week or $23,660 per year).
  3. The duties test (employee performs certain duties). 

The new rules will not change the salary test or the duties test, but will drastically increase the threshold on the salary level test from $455 per week to $913 per week ($47,476 per year).  In addition, the threshold will be adjusted every 3 years.

Come December 1st, if you have an employee whose salary is under $47,476 per year, you will now need to track their hours worked.  If they work over 40 hours in a week they will be owed time and a half overtime pay.  In addition, highly compensated individuals are exempt from overtime pay if their annual pay is over a certain threshold and meet a less stringent duties test.  The new rule will increase the highly compensated individual threshold from $100,000 to $134,000.  Employers need to start thinking now about what they are going to do.

The Department of Labor offers the following suggestions on how to handle the new rules:
  1. Increase salaries to the new threshold
  2. Keep salaries the same and pay overtime if need be
  3. Reduce or eliminate overtime hours
  4. Reduce the amount of pay allocated to base salary and account for overtime, as long as the base pay does not go below the minimum (essentially keeping the salary expense the same)
  5. Use some combination of the above

In addition to the above, it is also important to know that the new rules allow that 10% of the standard salary level may come from non-discretionary bonuses, commissions, and incentive payments, as long they are paid at least on a quarterly basis.

What should employers do?

First, figure out how many employees will be affected by the new rule.  Ask questions like: 
  • Who is salaried and being paid less than the new threshold?  
  • How many overtime hours do they work in a typical week?  A year?  
  • Are there specific times in the year when more hours are needed?  
  • Are there more efficient ways to complete projects to reduce or eliminate the need for overtime? 

Next, employers should consider their options with a cost/benefit analysis.  Ask questions such as:
  • Does it make sense to raise employees' salaries to the new threshold and not have to keep track of hours?  
  • Would it be better to keep salaries the same, track hours, and pay overtime when they work over 40 hours a week?  
  • Does it make sense to hire part-time workers to allow you to eliminate overtime hours?  
  • How will this decision affect your bottom-line?  
  • How will this decision affect employee morale?  Remember it is not just about the numbers, there is a human element, as well.  Whichever decision chosen may have a positive or negative impact on employee morale.

Finally, create a plan to implement the strategy so you will be prepared for December 1st:  
  • How is your organization going to track hours worked?  
  • How are you going to carefully budget for overtime hours?  
  • If new efficiencies are found, how and when are you going to train the staff? 

In an ever-changing market, it is important for companies to be able to adapt to their surroundings.  Preparation and understanding is the key to adaptation.

See the table below for an overview of changes or visit

Current Regulations
Final Rule
Salary Level
$455 per week ($23,660 per year)
$913 per week ($47,476 per year)
Highly Compensated Employee Total Annual Compensation Level
$100,000 annually
$134,004 annually
Automatic Adjusting
Every 3 years, maintaining the standard salary level at the 40th percentile of full-time salaried workers in the lowest-wage Census region, and the Highly Compensated Employees total annual compensation level at the 90th percentile of full-time salaried workers nationally.
No provision to count nondiscretionary bonuses and commissions toward the standard salary level
Up to 10% of standard salary level can come from non-discretionary bonuses, incentive payments, and commissions, paid at least quarterly.

Brian Koleszar, CPA